7 Nov 2014 Singapore vs Hong Kong - A Jurisdiction Analysis

IYER PRACTICE Singapore vs Hong Kong. A Jurisdiction Analysis

Singapore vs. Hong Kong

A Jurisdiction Analysis

SINGAPORE | HONGKONG

20 YEARS IN PRACTICE

Shanker Iyer 17 October 2014


1. General Background

2. Non-Tax Factors

3. Tax Factors

4. Conclusion

AGENDA

SINGAPORE | HONGKONG

20 YEARS IN PRACTICE

GENERAL BACKGROUND


Singapore & Hong Kong

• Area

– Singapore: 697 km2

– Hong Kong: (80 km2/1,104 km2)

• Population

– Singapore: 5.2 million

• median age: 38.4

– Hong Kong: 7.1 million

• median age: 41.1

4


Singapore vs. Hong Kong – General Factor Singapore Hong Kong

Ease of Company Formation 24 hours 4 days

Time Zone GMT + 8 hours

Business Language English

Foreign Exchange Controls None

Availability of Service Providers Plentiful

Economically and Politically Stable Very

Legal System Common law

World Bank Survey:

Ease of Doing Business 1 2

Starting a Business 3 5

Registering Property 28 89

Getting Credit 3 3

Protecting Investors 2 3

Paying Taxes 5 4

Trading Across Borders 1 2

Enforcing Contracts 12 9

Resolving Insolvency 4 19

5


Criteria Singapore Hong Kong

Tax System Territorial with remittance Pure territorial

No. of Tax Treaties 76 30

Participation Exemption No WHT on dividend distribution

Advance Rulings Available

GST (VAT) 7% None

Corporate Income Tax Rate Up to 17%

(S$5m – ETR 16.5%) Flat

16.5%

Double Tax Relief Ordinary Credit Method

(FTC Pooling) Ordinary Credit Method

(No Pooling)

Capital Gains Tax None

6

Singapore vs. Hong Kong – Tax

6


Setting Up and Ongoing Requirements Singapore

• Setting up

– Minimum one Singapore ordinarily resident director (Natural)

– Singapore resident company secretary (Natural)

– Singapore Registered Office (No PO Box)

– Control and Management in SG => Singapore Tax Resident

– Minimum share capital – SGD1

– No restriction on foreign ownership

• Ongoing requirements

– Audit (if not an EPC*)

– Annual Preparation of Financial Statements (SFRS ~ IFRS)

– Annual Tax return submission (waiver possible – dormant)

– Proposed new regulations in upcoming Companies Act to reduce audit requirements

GEN

ERA

L BA

CK

GRO

UN

D

*<20 s/h’rs and non-corporate shareholder and <S$5m revenue

7


Hong Kong

• Setting up

– Minimum one director (natural, can be non-resident)

– Resident Company Secretary (Corporate or Individual)

– Local Registered Office (No PO Box)

– No definition of tax residence (as per DTA) [Inc (HK); M&C (O/S)]

– Minimum share capital – HK$1

– Business registration certificate

– No restriction on foreign ownership

• Ongoing requirements

– Audit

– AGM/Annual Return

– Profits tax return

Setting Up and Ongoing Requirements

GEN

ERA

L BA

CK

GRO

UN

D

8

TAX FACTORS


Tax System

• Only income sourced in Hong Kong

TA

X F

AC

TO

RS

Hong Kong • Only income sourced in

Singapore

• Foreign sourced income remitted into Singapore (unless exempted)

Singapore

10


Singapore: Remittance

• (a) any amount from any income derived from outside Singapore which is remitted to, transmitted or brought into, Singapore

• (b) any amount from any income derived from outside Singapore which is applied in or towards satisfaction of any debt incurred in respect of a trade or business carried on in Singapore; and

• (c) any amount from any income derived from outside Singapore which is applied to purchase any movable property which is brought into Singapore

TA

X F

AC

TO

RS

11


Dividend Income (Received)

• Hong Kong sourced income

– Exempt from taxation

• Foreign sourced income

– Exempt even if remitted

Hong Kong

• Singapore sourced income

– Exempt from taxation (one-tier corporate tax system)


– Exempt from taxation unless remitted or FSIE

Singapore

12

TA

X F

AC

TO

RS


Singapore: Foreign-Sourced Income Exemption Scheme

• Exempt even if remitted

• Dividends, branch profits, service income

• Dividend (underlying tax or dividend tax)

• Conditions:

– Headline Corporate Income Tax tax rate of at least 15% in foreign

jurisdiction

– Subject to tax in foreign jurisdiction, except inter alia:

• if it is not taxed due to a formal tax incentive (e.g. substantive

business activities carried out in that jurisdiction)

– Beneficial tax exemption (Scheme would be beneficial to resident

taxpayers

TA

X F

AC

TO

RS

13


Dividend Income (Paid)

Hong Kong Singapore

• No dividend withholding tax

14

TA

X F

AC

TO

RS


Interest Income (Received)


– Exempt unless in carrying on such a business (financial institution)


– Exempt from taxation even if remitted

Hong Kong


– Taxable


– Exempt from taxation unless remitted

Singapore

15

TA

X F

AC

TO

RS


Interest Income (Paid)

• Withholding tax

– No interest withholding tax

– No deduction is allowed of interest paid to a non-financial institution if the recipient is not subject to tax in HK on the interest

Hong Kong

• Withholding tax

– 15% gross

– Deemed sourced in Singapore

– (Unless reduced by treaties)

Singapore

16

TA

X F

AC

TO

RS


Royalty Income (Received)


– Taxable


– Exempt from taxation

Hong Kong


– Taxable


– Exempt from taxation unless remitted

Singapore

17

TA

X F

AC

TO

RS


Royalty Income (Paid)

• Withholding tax

– 30% of 16.5% gross

– 100% of 16.5% (associated company & previously owned by a person carrying on business in Hong Kong)

– Deemed sourced in Hong Kong (deductible)

– Unless reduced by treaties

Hong Kong

• Withholding tax

– 10% gross

– Deemed sourced in Singapore (deductible)

– Unless reduced by treaties

Singapore

18

TA

X F

AC

TO

RS


Examples: Foreign-Sourced Income Exemption Scheme

• Conditions:

– Headline Corporate Income Tax rate of at least 15% in foreign jurisdiction

– Subject to tax in foreign jurisdiction, except inter alia:

• if it is not taxed due to a formal tax incentive (e.g. substantive

business activities carried out in that jurisdiction)

– Beneficial tax exemption (Scheme would be beneficial to resident

taxpayers

TA

X F

AC

TO

RS

19


Condition 1: Headline Rate > 15%

• Highest tax rate in the jurisdiction for specified entity

– E.g. Labuan entity (3%) vs. Malaysia entity (25%)

TA

X F

AC

TO

RS

20


Condition 1: Headline Rate > 15%

Debt & Equity & License of Royalty

Equity

Interest/Royalty (Paid outside SG)

Interest/Royalty Dividend

• Remitted dividend exempt (>15% Headline Corporate Income Tax Rate)

• Interest/Royalty exempt if not remitted

e.g. Downstream investment is not deemed remittance

21

TA

X F

AC

TO

RS

India

Singapore

UK

21


Condition 1: Headline Rate < 15%

Equity

Interest/Royalty (Paid outside SG)

Interest/Royalty Dividend

• Remitted dividend not exempt (<15% Headline Corporate Income Tax Rate)

• Interest/Royalty/Dividend exempt only if not remitted

e.g. Downstream investment is not deemed remittance

22

TA

X F

AC

TO

RS

India

Singapore

BVI

Debt & Equity & License of Royalty

22


Condition 2: Subject to Tax Test

• Tax of any amount

• Exceptions:

– Tax exemption due to substantive business activities (“tax incentive”)

• Section 13(12)

TA

X F

AC

TO

RS

23


Condition 2: Subject to Tax Test

Dutch co directly holding Ukraine properties

Dividends

• Dutch Corporate Income Tax headline tax rate >15% • Income generated from substantive business activities • Dutch exemption with progression not a tax incentive • “Subject to tax” condition not satisfied

24

TA

X F

AC

TO

RS

Singapore

Netherlands

Ukraine Real Estate


Taxes on Non-residents

• Rental income

– Location of property

• Technical service fees

– Where relevant services are performed

• Directors’ fees (if central management and control in HK)

– taxable

• Charter fees

– Only in Hong Kong waters

Hong Kong • Deeming provisions:

– Rental income

– Technical service fees

– Directors’ fees

– Charter fees

• Payments deductible in Singapore Co./PE

Singapore

25

TA

X F

AC

TO

RS


Taxes on Non-residents (WHT Rates)

• No withholding tax provisions on such fees

BUT

• Reporting to IRD

– Non-resident must file tax return

Hong Kong • Rental income (15%)

[Not final tax]

• Technical service fees (Corporate Tax Rate) [Not final tax]

• Directors’ fees (20%)

• Charter fees 0% (ships)/2% (aircrafts)

Singapore

26

TA

X F

AC

TO

RS


Tax Incentives

• None but:

– More certainty of source rules (case law)

– No remittance based taxation

– Tax exemption granted to non-resident funds operating in Hong Kong under certain conditions

Hong Kong

• Productivity and Innovation Credit

• Foreign Tax Credit Pooling

• Fund Management

• Marine Sector

• Global Trader

• Operational Headquarters

• Financial Services

Singapore

27

TA

X F

AC

TO

RS


Singapore Tax Incentives

• Productivity and Innovation Credit

– Up to 68% saving on expenditure relating to R&D, IP, IT and training of employees

– 60% cash payout (up to S$100,000 expenditure)

• Foreign Tax Credit Pooling

– Greater flexibility in the use of foreign tax credits

– Reduce tax payable

– Simplify tax compliance

28

TA

X F

AC

TO

RS


Singapore Tax Incentives (cont’d)

• Fund management activities

– 5% or 10% Corporate Income Tax rates

• Marine sector

– Full tax exemption on prescribed income of Singapore-flagged or foreign-flagged ships

• Global Trader Program


• Operational Headquarters


29

TA

X F

AC

TO

RS


Hong Kong: Source Case Law

Operations Test

• “All profits from business transacted in Hong Kong, whether directly or through an agent”

“What the taxpayer has done to earn profit in question” and “where has he done it”?

• Focus of the effective causes of profit

Where is the geographical location of the taxpayer’s profit producing activities?

Commercial answer: Practical realities?

[ING Baring, Hang Seng Bank]

30

TA

X F

AC

TO

RS


Hong Kong IRD Position

• DIPN 21: Locality of profits – cases don’t cover all situations

• Evidence:

– Expenses (Travelling/hotel)

– Agents (Agency agreement)

• Advance Rulings available

• Subject to tax overseas?

31

TA

X F

AC

TO

RS


Capital Gains

Hong Kong

• No Capital Gains Tax

• Tax if trading in nature

• Badges of Trade

• Safe Harbour

Singapore

32

TA

X F

AC

TO

RS


Badges of Trade

• Intention at time of purchase

• Period of ownership

• Frequency of similar transactions

• Reasons for sale

• Means of financing the acquisition

33

TA

X F

AC

TO

RS


Singapore: Safe Harbour

• Gains derived from the disposal of equity investments by companies will not be taxed, if:

(i) the divesting company holds a minimum shareholding of 20% in the company whose shares are being disposed; and

(ii) the divesting company maintains the minimum 20% shareholding for a minimum period of 24 months just prior to the disposal.

34

TA

X F

AC

TO

RS


Singapore: General Anti-avoidance (S33)

• Tax authorities can disregard or vary the arrangement, make adjustments to counteract any tax advantage

• Exception: any arrangement:

– Bona fide commercial reasons

– Main purpose ≠ avoidance/reduction of tax

• AQQ

35

TA

X F

AC

TO

RS


Hong Kong: General Anti-avoidance

• Use of “Artificial or fictitious transactions” to reduce amount tax payable (S61)

• Implementation of transactions with the sole or dominant purpose of producing a tax benefit (S61A)

• Sale of loss companies (S61B)

• IRD can disregard the transactions to remove the tax benefit gained (S61&S61A)

36

TA

X F

AC

TO

RS


Tax Treaties

• 30 full tax treaties concluded, 28 in force

• 0 full treaties pending

• No limitation of relief provisions

Hong Kong

• 76 in force

• 5 full treaties pending

• 5 revised full treaty pending

Singapore

37

TA

X F

AC

TO

RS


Tax Treaties (Geographical Split)

38

Region In Force Pending

Americas 4 1

Asia-Pacific 19 1

Europe 42 1

Middle East & Africa

11 2

Total 76 5

Region In Force Pending

Americas 2 0

Asia-Pacific 8 0

Europe 18 0

Middle East & Africa

2 0

Total 30 0

Singapore Hong Kong


Tax Treaties (Americas)

4 in force (1)

A to Z Barbados Canada Mexico Panama Ecuador (p)

2 in force

Singapore Hong Kong

A to Z

Canada

Mexico

39


Tax Treaties (Asia-Pacific)

19 in force (1)

A to P P to Z

Australia Papua New Guinea Bangladesh South Korea Brunei Sri Lanka China Taiwan Fiji Thailand Indonesia Uzbekistan Kazakhstan Vietnam Malaysia Mongolia Laos (pending) Myanmar New Zealand Pakistan

8 in force

A to P P to Z

South Korea Brunei China

Thailand Indonesia

Vietnam Malaysia

New Zealand

Singapore Hong Kong

40


Tax Treaties (Europe)

42 in force (1)

A to G H to M N to Z Albania Hungary Norway

Austria India Philippines

Belarus Ireland Poland

Belgium Isle of Man Portugal

Bulgaria Israel Romania

Cyprus Italy Russia Czech Rep. Japan Slovak Rep.

Denmark Jersey Slovenia

Estonia Latvia Spain

Finland Liechtenstein Sweden

France Lithuania Switzerland

Georgia Luxembourg Turkey

Germany Malta Ukraine

Guernsey Netherlands United Kingdom

San Marino (p)

18 in force

Singapore Hong Kong

A to G H to M N to Z Hungary

Austria

Ireland

Belgium Portugal

Italy Czech Rep. Japan

Jersey

Spain

Liechtenstein

France Switzerland

Luxembourg

Malta

Guernsey Netherlands United Kingdom

41


Tax Treaties (Middle East & Africa)

11 in force (2)

A to Z Bahrain Egypt Kuwait Libya Mauritius Morocco Oman Qatar Saudi Arabia South Africa UAE Rwanda (p) Seychelles (p)

2 in force

Singapore Hong Kong

A to Z

Kuwait

Qatar

42


Singapore: Certificate of Residence

• Control and management - not defined under Law

• Conditions:

- Foreign-owned company which is an investment-holding company with purely passive sources of income or receiving only foreign-sourced income is NOT eligible to seek a CoR, unless:

Such company can furnish the reasons for setting up an office in Singapore and provide evidence to substantiate that its control and management is in Singapore

• Manage and control the company from, and regularly hold board meetings in Singapore

43

TA

X F

AC

TO

RS


Hong Kong: Certificate of Residence

– Company incorporated or constituted in Hong Kong

– Company incorporated or constituted outside Hong Kong but managed or

controlled in Hong Kong

• Hong Kong-Mainland China CDTA:

– CoR for Hong Kong companies

• Copy of the Hong Kong certificate of incorporation

44

TA

X F

AC

TO

RS


Singapore Exchange of Information

• Information will be provided if request is reasonable and specific

45

TA

X F

AC

TO

RS


Hong Kong Exchange of Information

• No Court Order required

• Enter into tax information exchange agreements where necessary

• Enhance the existing EOI arrangements under CDTAs

46

TA

X F

AC

TO

RS


Singapore: Limitation of Relief Clause

• In many of Singapore’s tax treaties

– Treaty benefits to apply only on the amount of income remitted in Singapore

– Avoids double non-taxation

– E.g. of tax treaties without LOB clause: Austria, Cyprus, Georgia, Italy, Kazakhstan, Malta, Slovak Republic, Ukraine, Uzbekistan

47

TA

X F

AC

TO

RS


Singapore – India Treaty: LOB

• Exemption on capital gains from disposal of shares

• Treaty benefit remains in force so long as the same benefit is provided in the India-Mauritius treaty

48

TA

X F

AC

TO

RS


Singapore – India Treaty: LOB (cont’d)

• Company must not be a shell/conduit company i.e.:

– Negligible or nil business operations;

– No real and continuous business activities;

– Operating Expenditure < SGD200,000 or Indian

Rs 50,00,000 in the preceding period of 24 months from the date the

gains arise.

– Not publicly traded

• Affairs not arranged for the primary purpose to take advantage of the benefits

of this Protocol

49

TA

X F

AC

TO

RS


Conclusion: It Depends

CO

NC

LUSI

ON

50

+ve

– Pure territorial system

– Some treaties better (e.g. Indonesia)

– Case Law (sourcing rules)

– No GST

– Low/No WHT

– No resident director required

-ve

– Lack of incentives

– Lack of treaties/New treaties

Hong Kong +ve

• Incentives: PIC, Funds /Global Trader /HQ)

• Large number of treaties

• Lower effective tax rate

• Audit exemption

• Safe harbour (CGT)

-ve

• Remittance based taxation

• Withholding taxes

Singapore


Services:

• International & Domestic Tax

• Company Formation & Administration

• Trusts & Foundations

• Immigration & HR

• Funds & Family Offices

• Accounting & Financial Reporting

The insight to be your

trusted adviser

SERV

ICES

51


Disclaimer: This presentation of slides is intended as a general guide only, and the application of its contents to specific situations will depend on the particular circumstances involved. Accordingly, readers should seek appropriate professional advice regarding any particular problems that they encounter, and this presentation should not be relied on as a substitute for this advice. While all reasonable attempts have been made to ensure that the information contained in this presentation is accurate, Iyer Practice accepts no responsibility for any errors or omissions it may contain, whether caused by negligence or otherwise, or for any losses, however caused, sustained by any person that relies on it.

Contact Us

Sunil Iyer

Email [email protected]

Phone +65 6532 5746

Fax +65 6532 7680

52

80 Raffles Place

#26-01 UOB Plaza 1

Singapore 048624

Unit 29E, 29/F Admiralty Centre Tower 1

18 Harcourt Road, Admiralty

Hong Kong

Sanjay Iyer


Phone +852 2529 9952

Mobile +852 9355 3495

80 Raffles Place

#26-01 UOB Plaza 1

Singapore 048624

Shanker Iyer


Phone +65 6532 5746

Mobile +65 9760 6488

CO

NTA

CT U

S

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7 Nov 2014 Singapore vs Hong Kong - A Jurisdiction Analysis

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